Raising money – a quick comparison of options

A friend of a friend asked me what I thought of the different options for raising money for a for-profit startup. In case this is helpful to others, here’s a quick rundown:

An angel investor, meaning a rich person you can convince to give you money. This is usually the best route if you can make it work, because if it works at all there is typically close alignment between what the investor wants and what the company wants.

Venture capital firm. This is for the very high risk / very high reward route. VCs expect that one out of forty of their investments will pay off, and so when it does it has to pay off big. But it turns into a work hard/play hard environment, and Silicon Valley culture is just completely awful. Once you get VC funding, they have a lot of leverage, and as you need more money you have to do more of what they say — even if it doesn’t agree with your vision.

Academic funding. I don’t have any experience here, but I expect it’s exactly the opposite of VCs – low risk/low reward. If that option is available, it might be great.

Foundations. The big foundations most often fund nonprofits, but some like the Knight Foundation do investments in for-profit companies too. It’s a little like working with VCs, but I think the culture is a lot better when you work with a foundation.

Crowdfunding (like Kickstarter). Crowdfunding is actually the closest to free money, because you have so many supporters/investors that none of them have any power. If some of them are your friends, that’s even better because you have an added incentive to spend the money wisely. But compared to angels/VCs, if you go this route you’re sort of on your own. An angel/VC is like an added team member that you don’t get with crowdfunding.

There is really nothing as good as bootstrapping (self-funding), meaning you don’t take any money and just make things work. As soon as you take someone else’s money, you give them control and ownership in your company. The longer you can put that off, the more ownership and control you retain — which makes for a happier life and possibly more money in the long term. The more you can do on your own while you’re waiting for other options to work out, the more you have to show when you start asking people for money. Bootstrapping usually means you have a good, short-term business model — like selling something to someone.

Depending on what you’re doing, there’s also government grants and contracts (a pain in the neck to apply for) and sometimes government contests (e.g. challenge.gov), or other sorts of contests. (All of these would fall under bootstrapping.)

A lot of funding comes down to who you know and developing relationships and a track record over time that eventually lead to something working out. Often you don’t really have a choice of funding method because you have to be lucky forĀ anything to work out.

Disclaimers: GovTrack was bootstrapped, but it took 8 years to get to sustainability, so on balance it still may not have made a profit yet. POPVOX was angel-backed. if.then.fund is (currently) bootstrapped/self-funded.